development policy

Why all this talk of ‘institutions’ is rubbish

The Philippines is a place where development theories come to die.

This was the case in the 1950s when import substituting industrial policy or ‘picking winners’ was all the rage among development experts. The country was held up as a model of correct development planning and policy. It did not take long for us to prove that there was a flaw in this method which was that infant industries never grow up without a competent and powerful bureaucracy to direct and monitor them.

In the 1960s we flirted with liberalization, but it was a constant battle between the nationalists and internationalists that never seemed to go anywhere. Then in the 1970s the debt fuelled growth bubble came to town. The notion that underdevelopment was caused primarily by a lack of savings or capital would be fixed by borrowing externally. We also decided to emulate our ASEAN neighbors by imposing a more authoritarian model but to no avail.

In the 1980’s the bubble burst, and the country went into a steep recession followed by political upheaval. From the mid-80s we sought to steer away from the cronyism that came with authoritarian rule with varying success. We tried a Western liberal formula of economic stabilization, deregulation and privatization. It seemed to work in Eastern Europe but failed miserably in chaotic Russia. Our own experiment with it tended to emulate the latter.

The 1990s saw a rapid acceleration of trade openess with tarrifs going down faster than our external commitments to the world body, the WTO, required. We began to see more stable growth and saw poverty decline somewhat, but the growth was not fast enough to lift millions out of poverty in contrast to our rapidly developing neighbors in East Asia. These nations adopted a different formula, the BeST consensus (BEST stands for Beijing, Seoul, Taipei) which used a combination of liberalization and government intervention to strengthen their export industries.

In Latin America a resurgence of anti-capitalist regimes in country after country resulted due to the epic failure of neoliberal policies instituted earlier. The Washington elite that had peddled their development theory of open markets began to revise this paradigm. The new Washington Consensus tried to explain its earlier failures by declaring that markets needed the right set of institutions to function properly. Getting institutions right was required for markets to get prices right.

So we went down that road. Since the early 2000’s our business and political leaders have been spouting words like “rule of law”, “good governance” and “property rights” in keeping with the new consensus. It was all talk of course, but despite the fact that we suffered from weak institutions, the economy seemed to grow at a faster clip during the decade just as countries like China and Vietnam seemed to do without adopting Western legal and political institutions.

Where it began

During my undergraduate days at university in the late 80s and early 90s, there was not a single instance that I can recall when an economics professor uttered the word “institution” in class in relation to development. It was only when I entered grad school in the early 2000’s that the topic became vogue.

It became vogue because of “new evidence” that revealed its value. I remember reading “the evidence” found by a group of economists that wherever European explorers had dropped anchor and settled permanent communities on exotic shores, those communities developed into more vibrant economies many decades and centuries later compared to those that did not have that “privilege”.

The assumption made by the authors (who made names for themselves in the field and subsequently advised multilateral institutions like the World Bank) was that where these colonizers settled, they brought with them habits, practices and customs from the old world. These rules or “institutions” persisted even when they departed.

Unfortunately, I do not buy that idea. Let me tell you why:

First of all, there are good habits, and there are bad ones. Take for example Spain and its colonies. Many of the “institutions” exported by the Iberian power have not been supportive of development in the Hispanic world. Many studies have shown that former colonies who inherited the legal system of Spain and France have not progressed as much as those influenced by Anglo-Saxxon common law.

Ok, so you say, well, let us take the case of England. Its former colonies seem to be doing well. Think of the United States, Canada, Australia, Singapore, Malaysia and Hong Kong. Even India which despite languishing economically for decades since independence still managed to keep its railway lines functioning throughout the subcontinent following the habits of the Brits who count on their trains running on time. Doesn’t this prove the thesis, you ask.

Well, that’s my second point. In the case of the British Empire, it was not so much that they brought sound rules and practices with them. It was the fact that the Crown invested heavily in its colonies, nearly as much or even more than it had taken from them. You might take the establishment of a port or a walled city as a proxy for institutions, or you might see them for what they really are–public investment.

Lord Clive the baron who helped establish colonial rule over India and ran the East India Company, the world’s first multinational company put it succinctly, that it was “absurd to give men power, and to require them to live in penury.” The effective governance and riches of former British colonies are due to their willingness to devote an appropriate amount to the public purse.

This leads me to my third point, you cannot expect to have rule of law without the requisite investment. It does not occur out of “a re-awakened sense of right and wrong” or by appointing close relatives and bossom buddies to sensitive posts. We can already see where that is heading as dysfunctionalism within the PNoy Palace has claimed its first major scalp.

Implications

The current thrust of the Aquino government is to bring about Western styled institutions ‘on the cheap’ by not looking at new revenues to boost its capacity to operationalize them. In its first year, it hopes to achieve better governance while simultaneously shrinking the size and capability of the state. Instead of funding its own development by raising revenue, it relies on donor funding from external agencies and foreign governments.

That is fine if you want to wait for manna from heaven, but as the saying goes ‘heaven helps those that help themselves.’ So as a result of the unsustainability of its current model of development, it is faced with three distinct options:

  1. give up on good governance altogether in the short term, focus on growth, and then return to this down the track when it can afford to do so,
  2. go for good governance full throttle but with the accompanying investment (and by implication, raising taxes), or
  3. take a more pragmatic and targeted approach in moving the good governance agenda forward.

What I mean by the third option of using a targeted approach is that it will have to identify the forms of corruption that are tolerable (benign), and others that are not (malignant) and focus on getting rid of the latter. This is where it gets tricky. For those that take a “purist” moralistic stand on the issue and cannot countenance a return to the inglorious ways of the diminutive one, the choices are even more constrained.

So in answer to those that keep spouting words like “good governance” and “rule of law” on the one hand without factoring in the cost and accepting the need for higher taxes on the other, I say “hogwash: either put up, or shut up.” Institutions aren’t built simply out of an altruistic sense or moral revival. They are built with common sense pragmatism. The kind exhibited by Lord Clive all those years ago.

To use the RH debate as an analogy: you cannot expect people to have less children through abstinence alone; government needs to invest in reproductive health to provide better options. Just as in that debate, this one is about our willingness to produce other options aside from relying on “a few good men.”

So until we get our fiscal priorities right, I am afraid that all this talk of building institutions is just plain rubbish.

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